Wells Shares Nosedive As Profit Forecasts Fall

Shares of Wells Fargo skidded Monday (Feb. 5) in the wake of news that the Federal Reserve is taking action against the bank for the numerous scandals that have dominated headlines in the last few years.

At this writing, shares were off 8 percent to $58. At least five investment firms, CNBC said, published reports that downgraded the stock and lowered price targets.

As reported on Friday, the Federal Reserve said it will not allow the bank to grow in size or scope beyond the slightly less than $2 trillion on the books — in effect curbing asset growth beyond 2017 — a limit that will remain in place until “sufficient improvements” are made that address “widespread consumer abuses.” As has been widely reported, the company has been under fire for opening accounts without customer permission and had also signed consumers up for auto insurance they neither asked for nor needed.

The move is unprecedented, as the Fed has never before placed limits on how large a company can get.  Wells can still lend and take deposits.

In reference to corporate governance, Wells has two months to boost board oversight and compliance efforts. Three board members are on track to be replaced by April and a fourth by the end of 2018.

The analysts, several as of Monday, are bullish no more. The Fed’s moves will affect both Wells Fargo’s reputation and its financial results going forward.

In one note, RBC Capital Markets Analyst Gerard Cassidy took down the rating to “underperform” from “outperform.”

“We were surprised by the C&D [cease and desist] considering the amount of money, time and effort the company has already put into remedying the sales practice issues that were disclosed in late 2016,” Cassidy wrote on Monday. “Investors will have difficulty determining when the C&D will be lifted, resulting in an ongoing ‘cloud’ over the stock price and earnings.” The price target came down to $60 from $65.

In one note that CNBC said delved into the financial implications of the Federal Reserve’s action, Keefe Bruyette & Woods also cut its rating on the stock, this time to “market perform” from “outperform” — with an eye on earnings.

JPMorgan took its rating to “underweight” from “neutral,” and Morgan Stanley downgraded the name to an “underweight” from “overweight.”

In a note published Sunday, Analyst Brian Kleinhanzl wrote that “we believe WFC will have to be defensive until the C&D is lifted, and that is negative relative to our previous earnings forecast, which reflected the company being offensive. We would look to get more constructive when earnings visibility improves, but we expect that to be a year away at the earliest.” His price target went from $70 to $63.